National Pension Scheme (NPS) India – All You Need to Know

The National Pension Scheme (NPS) was a instrumental structure introduced by the Indian government to provide pension plan to people of India under the parliamentary act. This scheme is directly controlled by the Pension fund regulatory and development authority. The NPS is open to all the person who voluntarily want to invest in pension scheme, provided the age is between 18 – 60 years. The minimum investment contribution limit set up by government of India under this scheme is Rs 500 by the government of India. The minimum amount that needs to be invested is Rs. 1000 per year. Further this scheme provides a tax rebate of maximum Rs 50,000 under this scheme according to income tax act 80CCD (1B).

This is a national scheme introduced by the government for the people who look forward to invest in a retirement plan. According to this scheme the money invested will be further vested in debt or equity market as per the preference of the policy holder (C+E+G: explained below).

After retirement, the policy holder can withdraw 60% of the money and the rest 40% will be invested to purchase annuity. However the matured 60% of the amount is not exempted from tax. The new pension scheme or national pension scheme provides a huge range of choices of investments to select from.

Eligibility Criteria

The National pension scheme provides a flexible eligibility criteria where both Indian Citizen as well as NRI’s can also open an account for pension.

But the investment for both Indian Citizen and NRI is scheduled to be within the age limit of 18 – 60 years of age.

Further to apply for NPS a person must abide by the rules laid down as per the KYC guide lines, during the submission of form ” CS – S1 and CS – S2 “.

Further national pension scheme is not eligible for the following category or as per guidelines laid down by PRFDA, the categories are HUF, OCI, and PIO.

More over any person who already have a NPS account, will not further be allowed to open another account, as the single account can be accessed from anywhere and can be port from even employer to employer.

Further NPS is available to non salaried person – this scheme provides the facility of pension plans to the different scales of traders who can build a retirement sum for themselves using this scheme.

Highlights of National Pension Scheme

The national pension scheme provides the choice of 2 account or more flexibility – this scheme comes with 2 stages planned for the policy holder to provide them more flexibilty. The tier 1 plan under this instrument is the account where the policy holder submits his money for the retirement plan. Withdrawl of money from tier 1 is not allowed, as the plan is dedicated in building up a corpus for the policy holders retirement. However the tier 2 account comes with the flexibility of money withdrawl as per the need of the individual. However the existence of tier 2 can only be possible if the policy holder have tier 1 account.

The difference between Tier 1 and Tier 2 account is as follow :

Charecteristics

Tier 1

Tier 2

Mandatory for investing in NPS

Yes

No

Eligibility

Any resident Indian citizen or NRI

Tier 1 members

Liquidity

Yes, however it has certain conditions

Any point of time

Per annum number of contribution minimum

1

1

Per annum minimum payment

Rs 1000

Rs 1000 only at time of opening account

What is the minimum amount in single contribution

Rs 500

Rs 1000

Minimum balance in account to be maintained

N/A

Rs 2000

Investment style

Using CS – S1 and CS – S2

Using Tier 1 account

Fund Management Charges

As per instituation

As per instituation

Transfer funds from Tier 1 to Tier 2 and vice versa

No, transfer of funds from Tier 1 to Tier 2 is not possible

Yes, funds can be transferred from Tier 2 to Tier 1

Maintenance charges

Annual maintenance charges – Paid by the employer, if NPS is opened through employer

Activation and Transaction charges – To be paid by subscriber

Tax benefits on investment

Employees eligible for up to 10% of basic + DA, while self-employed eligible for up to 10% of gross income – Deduction under Section 80CCD (1), which is part of 80C, therefore limit is Rs.1,50,000 only

Employer contribution – up to 10% of basic + DA

Over and above 80C, additions Rs.50,000 can be availed under Section 80CCD (1b)

No tax benefit

Taxation on yearly earning

Not taxable

Not taxable

Tax benefit at maturity

60% lump sum that is withdrawn at retirement is taxable in that year. 40% corpus under annuity is taxed yearly as per the individual’s IT slab

60% lump sum that is withdrawn at retirement is taxable in that year. 40% corpus under annuity is taxed yearly as per the individual’s IT slab

Requirement of bank account

No

Yes

Policy holders employment status

For everyone

For non government employees.

Further NPS offers the flexibilty of investment, according to this scheme the money invested will be further vested in debt or equity market as per the preference of the policy holder. After retirement the policy holder can withdraw 60% of the money and the rest 40% will be invested to purchase annuity. Moreover, this flexibility offered to a policy holder is backed up 2 choices of investment mode active choice of investment and auto choice of investment.

EQUITY INVESTMENT UNDER NPS

Further there are 3 classes of assets investment choice also provided under each section, Class C , Class G and Class E

Class C– investments in fixed income instruments other than Government securities.

Class G – investments in Government securities.

Class E – investments in predominantly equity market instruments. Maximum investment in this class is 50% of total contribution.

For Active Choice the scheme reads as follow : Under this type of investment choice, the Subscriber has an option to choose a fund manager and provide the ratio in which his / her funds to be invested among the asset classes.

For Auto Choice the scheme reads as follow : NPS offers an easy option for those participants who do not have the required knowledge to manage their NPS investments. In case policy holder are unable to exercise any choice as regards asset allocation, their funds will be invested in accordance with the Auto Choice option. Under this type of investment choice, the investments will be made in a life-cycle fund. Here, the fraction of funds invested across three asset classes will be determined by a pre-defined portfolio. At the lowest age of entry 18 years, the auto choice will entail investment of 30% of pension wealth in C Class, 20% in G Class and 50% in E Class.

These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36. From age 36 onwards, the weight in C and E asset class will decrease annually and the weight in G class will increase annually till it reaches 10% in C, 80% in G and 10% in E class by the time the policy holder reaches the age 55.

For NPS auto choice the investment made in class C, G, E are as follow :-

Age

Asset Class E

Asset Class C

Asset Class G

Upto 35 years

50%

30%

20%

36 years

48%

29%

23%

37years

46%

28%

26%

38 years

44%

27%

29%

39 years

42%

26%

32%

40 years

40%

25%

35%

41 years

38%

24%

38%

42 years

36%

23%

41%

43 years

34%

22%

44%

44 years

32%

21%

47%

45 years

30%

20%

50%

46 years

28%

19%

53%

47 years

26%

18%

56%

48 years

24%

17%

59%

49 years

22%

16%

62%

50 years

20%

15%

65%

51 years

18%

14%

68%

52 years

16%

13%

71%

53 years

14%

12%

74%

54 years

12%

11%

77%

55 years

10%

10%

80%

Tax benefit offered under NPS

Finance minister announced an additional deduction of Rs.50,000 for new pension scheme. As a result, citizens who are in the highest tax bracket (30%) and thereby save Rs.16,000. The new extra deduction announced will take the total deduction allowed in the scheme under section 80C and 80CCD of IT Act, 1961 to Rs. 2 lakh. It is important to note that contribution to the new pension scheme up to Rs.1.5 lakh is not taxed. The new pension scheme has two tiers, namely, tier-I and tier II accounts. While a subscriber cannot withdraw from the tier-I account which is primarily structured for retirement savings, he or she can avail of tax benefits in tier II accounts.

Policy holder can also shift from one pension fund manager to another one in a year. It is important to note that there are no tax implications when an investor shifts his or her pension fund manager.

So suming up the tax benefit reads as the following : for tier 1 account.

Rs.1,50,000 as per section 80CCD(1)(section 80C) The deduction which may be claimed has to be minimum of 10% of gross income (in case of a self-employed taxpayer) or 10% of salary (in case of the taxpayer being an employee) or Rs.1,50,000.

10% of basic salary + dearness allowance as per section 80CCD(2). An employer’s contribution can be shown as deduction under section 36 I (IV) from business income. The minimum deduction claimed should not be above 10% of the salary while there is no limit in terms of the maximum amount. The deduction applicable as per section 80CCD(2) is, therefore, over and above Rs.1,50,000 as per section 80C and 80CCD(1).

However to apply for a National pension scheme the following document and application process a person has to go through.

The application procedure for NPS account to be followed is as follow :

As a Subscriber between the age brackets of 18 to 60 years of age, you can procure your Permanent Retirement Account Number application form from any of the Point of Presence – Service Providers (POP-SP) you wish to register with.

The PRAN application form must be filled up with i.e. photograph, signature, mandatory details, scheme preference details etc and also submit KYC documentation with respect to proof of identity and proof of address.

Submit the PRAN application along with the KYC documents to your nearest POP-SP . PRAN card will be sent to your correspondence address by CRA. Make your first contribution (minimum of Rs 500) at the time of applying for registration to any POP-SP.

The rest of the formalities and procedures will be taken care of by your POP.

National pension scheme or The NPS is run by PFRDA pension fund regulatory development authority, this body was created under a parliament act. This means that NPS is a highly secure policy and the sum assured will ultimately be availed to the policy holder without any worry.

Samnivesh is a web portal through which it seeks to connect to individuals and families that are looking to invest in the Indian Capital Markets. An initiative by Elite Wealth Advisors Limited is an effort to disburse knowledge regarding Financial Planning, Investments in different products and Insurance. Today, there are a plethora of products that are available for the retail investor to invest his hard earned money: Secured and Unsecured NCDs, Debt and Equity Mutual Funds, ULIPs, Taxable and Tax free Bonds just to name a few...Read More